« Universal Music Group Purchases EMI's Recorded Music Assets for $1.9 Billion | Main | NBA Season Hangs in Peril »

Why the Music Industry Isn't Ready for Redigi

By Kyler McGillicuddy

Redigi has been receiving a lot of attention by both the music industry in general and the Recording Industry Association of America (RIAA). The reason for this focus is the type of business Redigi is attempting to create. Redigi is a web based used digital music store. Though it has come up with a unique business plan for digital music, I don't believe that the courts should allow it to continue operating due to the potential market results. To really get a handle on the problem at hand, please bear with me as I explain a bit more.

Redigi works by requiring a user to download its program, which then searches the user's music library for acceptable music to sell. Acceptable music is any that has been legally downloaded, and therefore does not include tracks copied from a CD. Once it has indicated a music track to sell, the program uploads the copy onto Ridigi's website and deletes the corresponding file on the user's computer. Once uploaded, the track is assigned a number and is sold. Redigi does not sell more than 1 track per track uploaded. It works just like a retail store. For example, if 3 people upload the same track, then there are 3 of that particular track for sale. Once 3 people purchase the tracks, that particular track is no longer available until someone else uploads another.

In traditional physical music sales this would not be cause for much concern, passing legal muster by relying on the first sale doctrine of copyright law. The first sale doctrine allows owners of copyrighted material bought legally from the copyright holder to resell without infringement. If one wants to sell a used CD, one simply has to hand over the CD in exchange for money. Although this seems like this would be a fairly simple translation to a used digital music store, but there are some quirks of electronics that make it more complicated than first appears.

The problem with this transaction in the digital realm is that Redigi has to make a copy of the track at least twice; once when it removes it from the computer, and again when the track is sold to someone else. This is the legal basis for the cease and desist complaint brought by the RIAA against Redigi. The way I see it, the argument hinges on whether or not Redigi can copy music to take advantage of the first sale doctrine.

For the time being, I'm going to assume that all of the programming involved in Redigi's business plan works perfectly. This means that no pirated files are allowed, no copying tracks from CD's, and the original is deleted once uploaded. With those assumptions in mind, how would a decision allowing Redigi to continue effect the market and copyright?

First, consider the market. Redigi pays $.32 per track and sells each as low as $.59, considerably lower than iTunes. As a used digital track is just as good as a new one, basic economics would tell us that an identical good offered at a lower price will shift demand towards the cheaper one, so the market for new music will decline. There is a potential for an upswing to the market if people are more willing to purchase new music knowing that they can resell it, but of music users, I highly doubt the approximate $.30 difference in cost is restricting any current purchases.

Second, allowing Redigi to continue would hurt artists. Artists rely on sales of new music to survive. Artists do not get paid for used music sales. Used music sales would also affect artist contracts, as many contain escalation royalty provisions. Escalation provisions increase the percentage of royalty the artists receive as their sales figures increase. A used digital market would reduce the number of new tracks, and correspondingly reduce artist earning potential.

Finally, what about copyright? The courts would have to stretch copyright law to allow copying of digital music for resale. That places the digital copyright arena on an interesting slope. Just how much copying is allowed? What about movies? Will knowing there is a profit to be made from selling used music increase infringing copying? Are there other circumstances where copying to reach the first sale right is not infringing? The decision would have to alter copyright and the market to favor an outcome for Redigi. So let us consider what would happen should Redigi lose the battle.

First, the market would not change. The digital track sales will continue to increase and physical album sales will remain on a steep decline, and new music sales would continue to affect artist contracts. Second, copyright would also be unchanged. No change to the law is needed in order to find Redigi as an infringer, since the necessary copying it employs to upload and sell the track is illegal under the Copyright Act.

Redigi has come up with a novel business plan in the realm of digital music, and should be commended for the achievement. However, the drastic changes necessary to the marketplace and copyright law to accommodate its business plan are too destructive to allow.

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

About

This page contains a single entry from the blog posted on November 19, 2011 11:07 AM.

The previous post in this blog was Universal Music Group Purchases EMI's Recorded Music Assets for $1.9 Billion.

The next post in this blog is NBA Season Hangs in Peril.

Many more can be found on the main index page or by looking through the archives.